New Pandora CEO faces royalty fight with artists

LOS ANGELES • One of the biggest challenges facing Brian McAndrews, the new CEO of Pandora, will be renegotiating the royalty rates the Internet radio giant pays to the music industry.

If Pandora doesn't prevail, the outcome could impede the company's growth and hamper its ability to compete with services such as Apple's iTunes Radio, which launches next week.

For each song Pandora streams to listeners it pays a fraction of a penny to recording labels. The companies begin negotiations before the federal Copyright Royalty Board in January and both sides are already digging their heels in.

Just like past disputes, the haggling could drag on for years while the government plays referee. In the end, users might have to listen to more ads between songs or pay more in subscription fees to avoid them.

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McAndrews, 54, was appointed Pandora's CEO on Wednesday. He told The Associated Press that the royalty fight is "a ways off" and that he'll rely on the counsel of co-founder Tim Westergren and outgoing CEO Joe Kennedy.

"I'm confident we'll be prepared and do the right thing," he said.

"I do share Pandora's longstanding belief that musicians should be fairly compensated for their work," McAndrews said, adding that the existing patchwork of laws was "created piecemeal over decades" and "doesn't serve any one very well."

Pandora allows users to listen to music on computers, smartphones or other Internet-connected devices. It's free as long as listeners put up with a few ads. For each song Pandora streams, it pays the music industry a royalty fee, which in aggregate amounted to over $200 million last year. The royalty rate is set by the U.S. government.

McAndrews is the former CEO of digital advertising company aQuantive, which was sold to Microsoft for $6.3 billion in 2007. Pandora hired McAndrews in an effort to boost the money it makes from advertising.

While McAndrews said he'd focus on boosting ad revenue, music royalties are Pandora's biggest hurdle to profitability. The fees are the main reason Pandora posted another net loss in the quarter through July, despite revenue rising 55 percent.

Overcoming these costs has proven difficult. In February, Pandora restricted listeners to 40 hours of free mobile listening per month, in an attempt to limit royalty expenses. But it reversed the move in August after listener hours began falling.

Analysts have raised concerns about the bind Pandora is in, too.

"They're kind of stuck in this situation where they can't get to profitability from growing their users. They need to get to profitability from giving their users less content," said Rich Tullo, an analyst with financial services firm Albert Fried & Co. "That's a kind of tough position to be in as a company."

What's different about the upcoming fee negotiations is that Pandora's survival is no longer in doubt.

Since the company debuted on the stock market in the summer of 2011, Pandora has raised the cash to weather major setbacks. The company's stock has jumped 135 percent over the last year. Analysts expect that in the fiscal year through January, Pandora will post its first positive earnings per share since becoming a publicly traded company.

Pandora's revenue, which hit $427 million last year, is more than 20 times what it made in 2009, the last time it reached a deal with the recording industry.

It now has 72.1 million monthly users, and some 2.5 million people have activated Pandora in their car dashboards. Apple Inc. will launch iTunes Radio in an operating system upgrade next Wednesday. The free service will then be available to hundreds of millions of iPhone and iPad users, and could cut into Pandora's dominance.

Some artists believe they haven't been compensated enough for their contributions to Pandora's success. Many of them want a bigger share of the riches music streaming is generating.